Stressed households and high debt – the outlook for Australia’s economy

Patrick Broughton, September 2018

With stressed households and high levels of debt, what is the outlook for Australia’s economy? The July meeting minutes of the Reserve Bank of Australia (RBA), the Melbourne Institute’s Household, Income and Labour Dynamics in Australia (HILDA) survey, and the Australian Bureau of Statistics (ABS) release of Consumer Price Index (CPI) inflation data for the second quarter of 2018, all released in July, cast useful light on certain aspects of our economy – and it seems the outlook remains mixed.

The RBA noted there is no current case for an interest rate increase, the Australian economy was showing solid growth of slightly above three per cent, and inflation overall remained subdued. These are all positive factors for our economy. However, they also noted that household income growth remains stagnant, wage growth is historically low, and the state of household finances warranted “close and careful monitoring”.

Australia’s household debt-to-disposable-income ratio is around 200 per cent, according to the ABS

This is among the highest level in the world – with much of the debt represented by mortgages. High debt levels, without a balancing growth in incomes, makes Australian householders very sensitive to any rise in interest rates.

The HILDA survey, while based on data only to 2016, illuminates key trends affecting Australian households. Real disposable income has effectively been falling since 2009 – while at the same time, housing costs as a proportion of income have been rising. Housing stress has also been rising – this is where greater than 30 per cent of household income is spent on rent or mortgage payments and the household is in the bottom 40 per cent of income distribution.

The headline CPI number confirms that inflation is under the 2-3 per cent target band of the RBA. However, if broken down into discretionary items (i.e. TVs, cars and holidays) and non-discretionary (things you cannot do without, such as fuel, health, education), the CPI report adds to the household stress narrative. Non-discretionary inflation is rising at around three per cent above the level at which incomes are rising.

“Close and careful monitoring” is indeed warranted, but what does this mean for Australian investors?

Stressed households and high levels of indebtedness make it unlikely we will see robust consumer spending, which in turn further limits inflation. As such, the Dixon Advisory Investment Committee believes the RBA is unlikely to raise rates in this environment, which will continue to keep downward pressure on the Australian dollar against the US dollar, as the Federal Reserve (Fed) continues to raise US interest rates.

Further, with the bottom 50 per cent of households (by income) facing relatively tough times, it may be difficult for proposed tax cuts for higher income earners to find their way through a parliament where the lower house has a majority of one, and the upper house is, in effect, controlled by independent Senators.

High household indebtedness and low-income growth, coupled with low affordability, mean house prices could remain soft – particularly in the major metropolitan markets. The outlook for banks is likely to remain challenging as growth in mortgage lending comes under pressure from competition and a soft housing market, and while interest margins remain pressured by increases in wholesale funding.

In different times, the recent data releases could lead to the RBA lowering the cash rate – yet, this is something we understand they are reluctant to do from an already low 1.5 per cent. We believe Australian interest rates will remain on hold over the short-to-medium term, as the level of household indebtedness, along with other key economic factors (including a softening housing market, low inflation and low wage growth) limits the RBA’s scope to raise rates in the immediate future.

This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward-looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.

Contact us

The information on this website is general in nature only. It has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice which considers your objectives, financial situation and needs before making any financial or investment decision. Where the website refers to a particular financial product, you should obtain a copy of the relevant product disclosure statement or offer document before making any decision in relation to the product.